Archive for August, 2010

According to an account circulated among European exhibitors, after a screening of The Last Airbender 80% of Danish exhibitors independently decided not to show the film in 3D but only in its 2D version. Concerns cited included the fact that the quality of the film’s 3D was very poor, and the long term effects of charging premium prices for non-premium product.

Although the 3D version’s prospects were probably not improved by a release date a week ahead of Toy Story 3, cinema owners declining to participate in the exploitation of the hype around 3D in order to make a quick killing out of a bad conversion is, so far, a unique development – and a new type of row to add to boycotts elsewhere over theatrical windows and payments for 3D glasses.

Recent press surrounding the release of PricewaterhouseCoopers new Indian Entertainment and Media Outlook 2010 put a positive spin on the report numbers, citing the 12.4% compound growth forecast for the filmed entertainment industry which, if fulfilled, will take revenues to 170.5 billion rupees by 2014.

Compared to a year ago, though, PricewaterhouseCoopers is somewhat less optimistic. A stand-off over terms between producers and exhibitors saw a three month hole punched in the country’s 2009 release schedule, and box office drop 14% to 70 billion rupees from 81.3 billion in 2008. Although this could be argued to be a one-off event with limited implications for future growth, PricewaterhouseCoopers has taken the opportunity to downgrade its previous forecasts.

In 2009 the company was forecasting total film industry revenues for 2013 of 184.3 billion rupees, a figure now cut to 157 billion. Looking at domestic box office alone, the new forecast of 116 billion rupees in 2013 compares with a year-ago forecast of 132.3 billion.

With India’s inflation rate running at around 10%, PricewaterhouseCoopers’ new forecasts suggest fairly modest growth in real terms. This seems an adjustment in the right direction. India’s film business has been over-hyped recently. Its exhibition sector is huge and well-established, serving between two and three billion patrons each year and appears in many respects a mature market. Clearly there is scope for modernisation and a gradual growth in revenues from higher ticket prices, but India is not starting from the low base which has been a characteristic of other fast-growing cinema markets.

You can download the full PricewaterhouseCoopers report using the link below.

A report in the Financial Times on July 17th suggested OMERS (Ontario Municipal Employees Retirement System) would be a bidder in an auction for the Vue circuit due later this year, alongside the private equity firms Kohlberg Kravis Roberts and Permira. Although OMERS itself is a pension fund, it is the private equity arm of OMERS that is expected to bid.

So how much is the successful bidder going to have to pay? Cinema circuits have traditionally been valued in terms of a multiple of EBITDA (earnings before tax, depreciation and amortisation), or broadly operating profit with depreciation charges added back. Currently circuits are selling for six or seven times EBITDA.

Coincidentally, the closest comparable quoted circuit to Vue, Cineworld Cinemas, is trading on an implied valuation of around seven times historic EBITDA. At £1.98 each the company’s 141.7 million shares give a market capitalisation of £280 million; adding £109 million of long term debt, the resulting EV (enterprise value) of £389 million works out at 7.1x its £55 million of EBITDA in 2009.

The comparable EBITDA figure for Vue is £50.7 million so on this basis Vue is likely to be valued at close to £360 million.

Further consolidation in the UK cinema market is complicated due to competition concerns, all but ruling out a domestic trade buyer. Equally, it is hard to see why an overseas-based exhibitor would want to invest in the mature UK cinema market. Which leaves a private equity buyer or a flotation.

The problem for a private equity buyer will be to work out how to make a return on its investment. Vue is already a big player in what is essentially a mature market. Another flotation could still be on the cards.